South Korea stands out as one of the few economies globally experiencing a productivity surge attributed to artificial intelligence. However, analysts from Bank of America indicate that escalating tensions between the U.S. and China regarding semiconductor technologies could pose significant challenges to this growth.
Bank of America Global Research reports that the semiconductor sector constitutes 17% of South Korea’s exports, with the country enjoying a substantial benefit from the AI boom, leading to a reported 50% increase in exports year-over-year. The analysts project that South Korea’s robust investment in AI research and development, alongside a rising number of AI-related patents, will enhance its leadership in AI integration in the long run.
Nevertheless, the analysts caution that potential geopolitical strife may impact the semiconductor supply chain, particularly due to ongoing U.S.-China tensions, which could obstruct AI progress in South Korea. Although the nation has taken steps to diversify its chip exports beyond China, over 30% of its semiconductor exports were still directed towards China and Hong Kong in 2023, with similar levels exported to the U.S.
Bank of America analysts warned that if geopolitical tensions escalate and if the U.S. introduces further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for vital components and equipment used in chip production. Disruptions in the supply chain due to rising tensions could hinder their ability to acquire the necessary tools for semiconductor manufacturing.
Reportedly, the U.S. has urged South Korea to limit exports of semiconductor production equipment and technology to China, focusing on advanced logic chips beyond 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are reportedly considering these requests, mindful of potential repercussions for major domestic firms like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In parallel, the Biden administration is contemplating the application of an export control known as the foreign direct product rule, targeting allies that continue to supply chipmaking tools and equipment to China. This regulation would prohibit the export of any product to any nation if it contains a certain percentage of U.S. intellectual property components.